Russia-China Gas Deal

First Published: April 15, 2014 | Last Updated:January 21, 2015

After negotiations that continued for two decades, China and Russia have recently signed a landmark gas deal. As per this deal, Russia will export some $400 billion worth of natural gas to China over the next 30 years, or approximately 38 billion cubic meters annually at $350 per thousand cubic meters. The deal is good fit for both sides because:

China’s energy demands are rapidly escalating. China secures a long-term (30 years) supply of natural gas from Russia and Russia can reduce its dependence on the European markets as well as strengthen Russia’s position against Western sanctions.

Russia is looking to further diversify its Hydrocarbon exports away from Europe. Moreover, Russia was also particularly eager to clinch this deal with China because it will give it considerable leverage in its bitter energy talks with its once largest customer Europe.

This agreement is the biggest contract in the history for Russia and its state run Gazprom. To make the deal sweeter, Russia has also proposed that it will make several changes to its energy tax and export structure, to accommodate China. Further, Russia has also offered a stake in Gazprom’s LNG project at Vladivostok.

Geopolitical Dimensions

Historically, the Sino-USSR relations were more or less bitter. China and USSR had fought a small war in 1969 over border issues. During that war, the Soviet had even threatened China to nuke it, if it does not relent. The relationship was never comfortable during the Cold war. However, relations of China and Russia have dramatically improved generally after the Cold war era and particularly in recent times. Today, China is Russia’s largest single trading partner, with bilateral trade flows of $90bn in 2013.

The recent deal is being seen as Putin’s solid reply to west for its Russian antagonism and western attempts to isolate Russia with economic sanctions. The implications of this deal go well beyond the energy security. Thus, this deal highlights a major shift in Sino-Russian relations with widespread geopolitical implications. In the last decade, the Russia and China have worked together on minor economic issues.

In recent times, China and Russia have found a common political ground of aligning constantly against the western interest, which is evident from the following:

Russia and China have stood together on voting at the U.N. Security Council on issues involving Iran and Syria. Recently, they vetoed a draft UN resolution to send Syria to the International Criminal Court for war crimes. They had also vetoed three previous UNSC resolutions condemning Syria.

Both countries recently conducted a joint naval drill in East China Sea, sending deterrence message to Japan and the U.S. It also indicates that Russia is now moving closer to China’s side with regard to the territorial disputes between China and Japan.

China and Russia have also signed an agreement that both countries will deepen cooperation under the Conference on Interaction and Confidence Building in Asia (CICA), a new security framework in Asia-Pacific that conveniently excludes the U.S. and Japan.

The above bonhomie has been mainly induced by the Ukraine crisis which damaged the Russia-West relations and put onerous sanctions on Russia. Both countries would favour a multi-polar world that is not dominated by the U.S. Moreover, the need to win the maritime disputes with Japan makes China maintain good relationship with Russia. From Russia’s angle, the NATO expansion is a serious threat to its national security. With limited capabilities, Russia desperately needs a reliable strategic partner. However, whether China is that reliable partner or not, is yet to be seen.

Some view the recent China Russia bonhomie as a “marriage of convenience”. Their relation is not seen as any kind of more durable partnership. This is because of the bitter history they share. In 1950s, they had a Sino-Soviet axis; or more precisely the Sino-Soviet Treaty of Friendship. But later it turned into a conflict. At times, the two countries have seen each other as potential partners and also potential threats.

West has never trusted Russia and at present, Russia has no better alternative to siding with China. But turning their relationship to a formal alliance would lead to unnecessary problems for both. China is far too intertwined with western Economies. Any effort to make a re-alignment can create complications. Thus, the return of the Sino-Soviet axis or a formal alliance between the two countries depends on whether they have long term shared strategic interests.

Analysis: Prospects of such as deal with India

At present India imports around 0.5 million tonnes crude from Russia. Currently, there are two possibilities of having such a deal between India and Russia:

Plan A: Constructing a gas pipeline from Russia to India via China.

Plan B: Long term LNG supply and Gas swap deals if Plan A does not work out.

The discussion on a Russia India pipeline had began as back as 2005. In December 2013, a joint statement by Vladimir Putin and Manmohan Singh said: “Russia and India have agreed to establish a joint group to study the possibility of direct ground transportation of hydrocarbons”. If this $30-billion pipeline from Russia through China’s Xinjiang province works out, it will be among the world’s most expensive pipeline projects. At the same time, China is supportive to such a pipeline because this will allow China to become an oil transit in addition to its ‘status’ of recipient of the Russian oil. But, it is almost impractical to bring a pipeline from China to India through the Himalayas, because of physical challenges. On the other hand, if any pipeline comes via Central Asia, it will need to cross Afghanistan and Pakistan; which is again not feasible in current circumstances. If plan A fails, there is possibility of Plan B involving LNG imports or swap deals. We note here that the $9-billion Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline is struggling to find a consortium leader as of now.